Gold price (GCZ23) reached an unprecedented peak of $2,130.2 per ounce on the COMEX exchange before experiencing a slight retreat. This surge, marking a more than 16% increase over the past month, follows growing speculation that the Federal Reserve and European Central Bank (ECB) are transitioning from tightening to potential interest rate cuts in the coming year.
The rally gained momentum last Friday when Federal Reserve Chair Powell remarked that monetary policy is “well into restrictive territory,” triggering a gold-positive decline in the dollar and T-note yields. Despite Powell also stating that it would be premature to confidently conclude a sufficiently restrictive stance or speculate on when the policy might ease, gold prices continued to climb. ECB Governing Council member Villeroy de Galhau added to this sentiment, suggesting that ECB rate hikes are over and rate cuts could be considered in 2024.
Gold’s recent upswing is attributed to various factors, including safe-haven demand amid geopolitical concerns and increased purchases by central banks, notably China. The People’s Bank of China (PBOC) reported an ongoing accumulation of gold reserves for the twelfth consecutive month in October. Tiberius Group AG highlighted gold as a hedge against inflation, speculation of interest rate cuts, and global uncertainty due to costly conflicts.
Swaps markets are now reflecting expectations of interest rate cuts by both the Fed and ECB in early 2024, fueling the surge in gold prices. The markets are pricing in a 62% chance of a -25 basis points rate cut at the March 19-20, 2024, FOMC meeting, and a more than 131% chance of a similar cut at the April 30-May 1, 2024, FOMC meeting. Additionally, swap markets indicate a 73% probability of the ECB reducing its benchmark rate by -25 basis points at the March 7 meeting and a more than 153% chance of the same cut at the April 11 ECB meeting.
Despite the record high in gold prices, some analysts express caution, suggesting the rally may be overdone and unsustainable without increased fund demand. Oanda Asia Pacific Pte raises concerns about a potential pullback in the short term, attributing today’s rally to stop-loss orders. Investor participation in gold, particularly through exchange-traded funds (ETFs), has been tepid, with ETF holdings down over -20% from the record high in 2020. UBS Group AG emphasizes that for gold prices to climb even higher, there needs to be a notable increase in investment demand, particularly in the form of greater ETF purchases.
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